Model portfolios are boosting ETF growth, says Cerulli

Model portfolios in the US have boosted the growth of exchange traded fund assets, as ETFs have cemented their place as an “important building block” for models, a report shows.

Asset managers and third-party strategist model providers have an approximate 54 per cent allocation to ETFs, a report by Cerulli Associates shows.

Some 12 per cent of financial adviser assets are held within “practices that primarily use model portfolios as their portfolio construction process” but Cerulli estimates that 24 per cent of assets within practices are considered “model portfolio targets”, the report notes.

These practices start with models but then make modifications or customisations on a client-by-client basis, according to Cerulli.

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ETF assets surpassed mutual fund assets within models in April.

“The industry will continue to see model adoption, as wealth manager home offices push advisers toward them and advisers realise the resulting benefits,” Matt Apkarian, associate director at Cerulli, said in the report.

Assets in third-party model portfolios hit $424bn in mid-2023, a 48 per cent increase from two years previously, according to a February report from Morningstar.

BlackRock is the largest model provider, with $84.3bn in model assets as of June 30 2023, while Capital Group is the second-biggest, with $75.4bn as of the same date.

But use of ETFs within models is not restricted to model providers packing their own ETFs into model portfolios, the Cerulli report noted.

Some 31.4 per cent of model portfolio assets are in proprietary ETFs, and 27.1 per cent of model assets are in non-proprietary ETFs.

WisdomTree, a model provider and ETF issuer, could populate a model solely with proprietary ETFs, but advisers and clients are largely wary of a single-issuer portfolio, said Thomas Skrobe, head of portfolio solutions at WisdomTree.

The firm had $3.5bn in model assets as of March 31, up from $3.2bn at the end of 2023.

WisdomTree is “closing in on” $4bn in model assets, 65 per cent of those are in its ETFs and the rest are in non-proprietary products, Skrobe said.

“We expect the ETF to feature more heavily in model portfolio construction as newer products begin to hit their three- and five-year track records, which are typically required for consideration,” Apkarian said.

Some of those recent ETF entrants, such as AllianceBernstein, Capital Group and T Rowe Price, have ETFs approaching those track records, Skrobe said.

Doing so will allow model providers that use ETFs to allocate to well-known asset managers with which advisers are familiar, he said.

AllianceBernstein provides actively managed ETFs, mutual funds and separately managed funds to model managers who have a propensity for efficiency that comes with the ETF wrapper, according to Noel Archard, its global head of ETFs.

The firm views active ETFs as one of the best “entrées” into third-party home office and strategist models.

“Growing model adoption has been largely driven by the rise of fee-based advisory and higher demand by wealth managers for home-office and strategist models, post the Global Financial Crisis,” Archard wrote in an email.

Models allow advisers to focus their time on service and business building to create scale in their practices, as opposed to making individual investment decisions, he wrote.

But not all model providers are keen on adding active ETFs to their models.

Active ETFs’ higher fees, relative to their passive counterparts, could be a turn-off for investors, noted William Roach, president of model provider Globlalt.

Active or not, Roach expects model delivery to be “one of the fastest-growing reservoirs” in asset management due to the time and effort it saves advisers.

Archard pointed towards the growing use of ETFs with separately managed accounts in the same model portfolio, creating room for additional customisation where needed.

And customisation within models is one of the largest emerging trends within the space, Skrobe said.

Overall, firm resources, including model portfolios and external sponsor models, influence advisers and further spur ETF adoption, Apkarian said.

“Given the industry movement toward model portfolios, ETF providers should seek opportunities for placement within proprietary and third-party model portfolios,” he said.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.